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Patience Yields Profits

Profits are elusive in a sluggish economy but there are always opportunities for patient investors. Expect this fund to uncover innovative companies that will serve investors for the long haul. 

Nicholas Limited Edition (MUTF:NNLEX) has enjoyed a big run this year, gaining 15 percent. That performance has been driven by savvy individual stock moves, and a few of the fund’s holdings have been bought out by larger firms.

Portfolio manager David Nicholas focuses on small-cap growth names with the potential to grow their earnings by more than 15 percent over three to five years. With a low turnover ratio, the fund aims to identify “today’s small companies that will become tomorrow’s big companies,” according to the fund’s management team.

Nicholas said that high-quality growth companies are the best investments during a weak economy. He likes companies that have managed to sustain growth without seeking funding from capital markets. The manager also gravitates toward firms that boast a high return on capital and assets, strong cash flows, and a solid management team. His team also likes to see high levels of insider ownership, as this provides incentives for the management team to see the company succeed.

“The economy will be sluggish for a bit, so we feel that being focused on unique companies that have their own growth prospects outside the general economic recovery will benefit the most,” Nicholas said.

The fund is overweight in the information-technology sector, because management believes that companies in this economic environment will soon look to upgrade their technology. Companies have been wary of spending due to lackluster sales growth. But corporations today have healthy balance sheets and ample liquidity, and over the next two years firms will likely be willing to spend on technology.

Management also sees opportunities in the industrial and manufacturing sectors. Companies in these sectors are focused on exports to rapidly growing emerging markets, many of which are racing to build new infrastructure on a massive scale. The strength of the economic growth seen in many of these emerging markets, combined with a weak US dollar, should bode well for US exports.

The US consumer has cut back on spending since the start of the financial crisis. But Nicholas expects the consumer-discretionary sector to recover as the economy improves and battered consumers slowly regain their confidence.

The fund is also overweight in the health care sector. With aging Baby Boomers approaching retirement, growth in this space is expected be strong. One of the fund’s holdings is NuVasive (NSDQ: NUVA), a company that provides an innovative solution for back surgeries. Demand for back surgeries should increase as the population ages, and the firm is well positioned to grow by more than 20 percent over the next three to five years.

Many of the fund’s holdings have a market capitalization in the neighborhood of $1 billion. But management believes these firms have the potential to grow their market capitalization to as much as $5 billion over time.

Investors that have the patience to stick around won’t be disappointed.

Why to Buy
Nicholas Limited Edition (NNLEX)

  • Long-term investment approach
  • Low expense ratio for its small-cap growth peer group
  • Highly experienced management team

Disclosure: no positions